IBM Surrenders to China’s IT Infrastructure Wishes

IBM has decided to build a new supply chain of computers and software through partnerships with Chinese-based companies. This move suggests that company executives have grudgingly accepted that the Chinese government is determined, and will eventually succeed, in a quest to replace foreign technology used in sensitive areas of the economy with Chinese made products.

IBM CEO Virginia Rometty reflected on changes to the Chinese technology market when she spoke at the China Development Forum in Beijing earlier this year. In an article published in China Daily, Rometty is quoted as saying:

If you're a country, as China is, of 1.3 billion people, you would want an IT industry as well. I think some firms find that perhaps frightening. We, though, at IBM … find that to be a great opportunity.

Is this really a “great opportunity” for IBM? When IBM shares its technology with Chinese firms who then make products built, in part, on IBM technology, does this put IBM in a better business position compared to the days when the company wasn't required to partner with Chinese original equipment manufacturers (OEMs) to put IBM equipment into Chinese customers?

Today, IBM is helping China build a new IT infrastructure spurred on by the Chinese government's implementation of tighter restrictions on foreign technology. These limitations, placed particularly in the banking sector, has caused companies like IBM to rethink their supply chains as they find new ways to sell their products in China.

IBM's approach is to participate in a series of initiatives that promote relationships with Chinese companies that are aligned with IBM's focus on data, cloud, social, mobile, and security.

For example, one of its initiatives is with Teamsun, a Beijing-based company, that IBM has teamed with to provide “a partial blueprint of its higher-end servers and the software that runs on them,” a New York Times article reported.

Teamsum, an IT products and services company serving Greater China and Southeast Asia, offers various types of products such as server, storage, network, security, communications, software, backu and OEM services.

In Teamsun, IBM has found a Chinese partner with the technological capabilities that IBM can piggybacking on as it creates new computer hardware and software running on IBM technology that it hopes will be approved for use by Chinese authorities in key industries.

IBM's effort to incorporate its technology into Chinese products comes at a time when the company is changing course, moving away from low-profit segments of its business such as cash registers, semiconductors, and low-end servers in favor of high-value solutions such as security software and cloud services. This transition has been painful – a fact that is reflected, in part, by the company posting three years of declining revenues.

Making matters worse, IBM's is smarting from recently introduced measures to the bank-technology rules and a proposed counter-terrorism law that calls for the development of Chinese technology that come with “secure and controllable” features.

These measures were implemented in the aftermath of former National Security Agency contractor Edward Snowden's revelations that U.S. spy agencies embedded code in American technology sold overseas as a way to spy on foreign entities.

Still, a Reuters report that China temporarily suspended its IT security measures because financial institutions have resisted proposed changes, suggests that for now replacing foreign technology with Chinese made products isn't easy to achieve.

“I don't think the Chinese government wants to remove all foreign technologies out of financial industries. The Chinese government wants to enhance the control of information security,” said Gene Cao , an analyst at Forrester Research. “After working with Chinese partners like Teamsun, IBM can continue their solution sales which bundles IBM's hardware, software and services through joint ventures.”

Teamsun, as well as Chinese server manufacturer Inspur and Chinese telecommunications equipment and systems company ZTE Corp., and other Chinese IT firms are all members of another IBM project called OpenPOWER. Launched in 2013, OpenPOWER is an organization focused on data center solutions.

Another sign of the times is IBM's agreement with Chinese company, Suzhou PowerCore, which was announced last year. In a press release the company said:

Suzhou PowerCore plans to license IBM's POWER architecture, intellectual property related to POWER8 and chip design tools to develop and market processors for servers in China.

Bradley McCredie, vice president and IBM Fellow, IBM Systems & Technology Group, said in a statement:

The proposed collaboration between Suzhou PowerCore, the Research Institute of Jiangsu Industrial Technology and IBM will benefit those innovative businesses in China that are aggressively taking advantage of big data and cloud computing to capture growth in such industries as banking, communications, retail and transportation.

The New York Times notes that IBM has discussed with clients the opportunity to let them build local encryption over its z13 mainframe computer, which represents a way to comply with the anti-terror law that requires Chinese companies to provide encryption keys or use local encryption standards.

According to Forrester's Cao , IBM decided to allow clients to build local encryption over its z13 mainframe computer primarily because of the huge installed base of IBM z Systems in China's financial industry.

“IBM has to do this to convince Chinese regulators [and] to enable new purchases of mainframe computers in the financial industry,” Cao said.

As IBM's China strategy takes shape, competitors like HP, EMC, and Oracle will have to develop their own plans as they adjust to China's heightened suspicion of foreign technology products.

“I know some vendors are doing similar local partnerships with systems integrators or ISVs, but others are discussing if they'll quit the Chinese market or not,” Cao said.